Opinion: Wilbur Ross says a very dumb thing about the oil business

Commerce Secretary Wilbur Ross is an extremely successful businessman who apparently doesn’t know that the oil business is affected by the laws of supply and demand. If he did, he wouldn’t have said the dumb things he said on Thursday about the oil-patch recession.

Ross said it was all Obama’s fault. It wasn’t supply. It wasn’t demand. It was Barack Obama.

Ross pointed to big declines in state GDP in 2016 in the oil patch and blamed it all on Obama. Growth in those states had been “impeded by the policies of the Obama administration, especially in the energy sector,” he said. And then Ross crowed about a big increase in oil drilling in the first three months of this year, and gave all the credit to President Donald Trump’s policies.

Source: BEA

Investments in oil and gas drilling boomed from 2009 to 2014, then collapsed when the price of oil fell. With prices rising again, investments are growing once more.

Why is Ross’s attack on Obama nonsensical? Because economics.

If the decline in energy production in the United States in 2015 and 2016 had been due to onerous regulations and anti-energy policies squeezing producers, then the market would have responded by sending the price of oil
US:CLM7
and gas
UK:LCON7
higher.

That’s how markets work, as any billionaire can tell you. If you squeeze the supply of something while demand stays constant, the price will rocket higher.

But that didn’t happen, of course. We all remember what really caused the recession in the oil patch: Low prices.

How in the world Ross got to be rich when he can’t tell the difference between low prices and high prices, I’ll never understand. I guess that’s why I’m not rich.

Source: CME Group/Haver Analytics

The price of oil collapsed in 2014. The cause? Too much supply and not enough demand.

Here’s what really happened in the oil patch: Global oil prices collapsed in the summer of 2014, falling from around $106 a barrel in the summer of 2014 to around $30 in the winter of 2016. The primary cause: Too much supply and not enough demand. The fracking revolution had boosted global supply of fossil fuels. However, growth in the emerging markets, which had kept demand for oil strong for years, began to weaken in 2014 and 2015. Suddenly the world was awash in unwanted oil.

Even a billionaire could guess what would happen next.

When the price collapsed, producers shut down some production, as well as exploration and the development of new oil and gas wells. The Organization of Petroleum Exporting Countries announced lower production quotas for its members.

According to the U.S. Energy Information Administration, U.S. crude oil production dropped 11% from April 2015 to September 2016 (after nearly doubling from January 2009 when Obama took office).

U.S. oil and gas producers cut their investments in new production by an incredible 71% between the fourth quarter of 2014 and the third quarter of 2016, according to the Bureau of Economic Analysis. That decline rippled through the economy. About 230,000 workers in the mining industry lost their jobs. The collapse in oil-patch investment was a huge drag on national GDP for a couple of years.

States that rely on energy production suffered. The GDP of North Dakota fell 3.1% in 2015 and 6.5% in 2016. In Wyoming, GDP dropped 0.3% in 2015 and 3.5% in 2016. Alaska’s GDP dropped 5% in 2016. Ross specifically blamed the economic contraction in these energy states on Obama’s environmental policies.

That’s a lie.

Oil prices have been relatively stable lately. Since June, crude oil prices have mostly been between $45 and $55. At the same time, global demand is rising again, thus encouraging more production.

In the U.S., investment in new drilling has perked up again, stabilizing in the fourth quarter of 2016 and then popping by a tremendous 449% annualized rate in the first quarter of 2017. Investment rose to $74.4 billion from $47.8 billion.

That’s a huge gain, but the level is still just half of what it was in 2014 when the crisis began.

There may be a case to be made for the federal government to make it easier to extract oil and gas in America, but Ross did not do so on Thursday. Contrary to Ross, the forces that drove the boom and bust in oil have almost nothing to do with Obama’s or Trump’s policies, and everything to do with market forces.

It’s the height of political hackery to suggest that Obama was responsible for the oil-patch recession. If he is responsible for the bust, then he’s got to be given credit for the oil-patch boom that took place when he was in the White House. And I know Wilbur Ross would never say anything that dumb.

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